British American Tobacco could make more acquisitions in Indonesia after its purchase of a majority stake in the country’s fourth-largest cigarette maker for $494m.
The group, maker of Dunhill and Lucky Strike cigarettes, said its 85 per cent stake in Bentoel Internasional Investama would give it a foothold in Indonesia’s lucrative kretek – or clove-flavoured cigarette – market, which accounts for 93 per cent of the country’s tobacco sales.
Ben Stevens, BAT’s finance director, said there could be further room for consolidation given that the deal would lift BAT’s market share by volume in Indonesia only from 2 per cent to 8 per cent, leaving it a small operator in the world’s fifth-biggest tobacco market.
He said: “It would depend on whether the other guys are selling.”
He said 8 per cent was still a small market share and BAT would like to increase that. “If another acquisition opportunity comes up we would certainly not rule it out.”
Philip Morris International, BAT’s main rival, is the Indonesian market leader with about 29 per cent of the estimated 230bn kretek sticks sold last year, mainly through its Sampoerna unit, which it bought for $5bn in 2005. It is followed by Gudang Garam and Djarum, two local companies that control 21.1 per cent and 19.4 per cent of the market, respectively.
The tobacco industry has experienced falling cigarette sales in many developed markets as a result of growing health concerns, smoking bans, higher taxes and advertising restrictions. Like its rivals, BAT has sought to build sales in emerging markets as tobacco consumption in western European markets declines.
Indonesia has comparatively lax rules and is the only Asian country not to have signed the World Health Organisation’s Framework Convention on Tobacco Control.
Government officials acknowledge the long-term cost of its policies is likely to be greater than the short-term gains, but are conscious that harming the interests of millions of people employed in the industry could be politically damaging.
Last year, BAT spent about £3bn ($4.9bn) to acquire Tekel, the Turkish tobacco company, and Skandinavisk Tobakskompagni, the cigarette arm of Denmark-based ST Group.
Some 61 per cent of revenue and 69 per cent of operating profits were generated by operations outside Europe.
Analysts said the deal, at 12.9 times underlying ebitda earnings, was expensive, particularly compared to the Sampoerna acquisition, at 13.7 times. But they added BAT had little choice considering its waning share in Indonesia, where cigarette sales jumped 11.5 per cent in the first quarter of this year to 59bn sticks compared to the same period last year.
Deutsche Bank and UBS advised BAT on the deal while Credit Suisse advised Rajawali, which owned 56 per cent of Bentoel.
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A lot of cigarettes companies are trying to acquire cigarettes companies from Asia due to the declining cigarette consumption in the US and Europe Market as a result of health concern and new high regulation in the industry.
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